The Housing Bubble

It’s Friday desk clearing time for this blogger. “London’s homes generated more wealth than the entire New Zealand economy last year as their total value soared by in excess of £100 billion, according to new research. The last handful of London homes to go on the market for less than £100,000 have been sold or are under offer. Agents said a ‘milestone’ had been reached, with flats never again likely to be valued in five figures, barring a property market collapse. Property search engine Placebuzz founder Andy Hatoum said: ‘This may be the last time we see properties under £100,000 being sold in the capital — well on land at least, as the only homes available in the category are houseboats.’”

“The Houston real estate market ended 2013 on a strong note, according to the latest numbers. The average price of a single-family home rose to more than $265,000 dollars, up more than 10% from a year earlier. ‘If you’re inside the Loop, you’re probably at bubble pricing right now, based on the lack of inventory,’ said Shad Bogany, immediate past chair of the Texas Association of Realtors.”

“Multi-family sales in southern Maine continued a strong rise in key markets like Portland and Saco/Biddeford over the past year, according to Brit Vitalius, president of the Southern Maine Landlord Association. ‘Half of the properties that sold in Portland went under contract from March to May. ‘In the spring it felt like there was a mini bubble,’ he said.”

“The future appears bright for the Las Vegas valley, according to the Las Vegas Metro Chamber of Commerce. Even with the positive outlook, there are some concerns, especially when it comes to housing. ‘We’ve used some policy decisions to create a housing market that has quite a few people living in a home that they’re not paying for. At some point, that’s going to have to give,’ said Jeremy Aguero, principal analyst with the local research firm Applied Analysis.”

“Slow job growth and a slower judicial process are impeding Connecticut’s ability to fight through a foreclosure crisis that refuses to quit, according to economists statewide. ‘Our average length of time for foreclosures to go through the system is one of the longest,’ said Pete Gioia, an economist. Though Gioia acknowledged that the judicial process helps some homeowners who are trying to regain their financial footing, he said there are some ‘deadbeats who tool the system.’”

“Property repossessionss, home auction notices and mortgage default activity in the Scranton/Wilkes-Barre metro area soared by 60 percent, compared to 2012, according RealtyTrac. ‘I’m a little busier than I have ever been,’ said Joe O’Connor, who has been selling foreclosed properties since 1988. ‘They just keep coming.’ Some of the sales represent ’shadow inventory,’ which banks withheld from the market to forestall downward pressure on home prices, Mr. O’Connor said. ‘I have had more pre-sheriff’s sale requests than I have ever had,” he said. “I’m getting more (homes) over $250,000 in the last three years than I did in the 20 years before that. In my opinion, we still have another two or three years of increased foreclosures coming.’”

“All good things must come to an end. And so, after enjoying the lowest mortgage rates in 50 years, it’s time to wave goodbye. The Official Cash Rate is finally expected to start rising, possibly as early as next week - which means those who bought houses during the good times could be in for a rude awakening. More than 60,000 New Zealand households who own or part-own their homes are already stretched, spending 40 per cent or more of their total income on housing. By the end of the year, someone with a hefty half-million dollar debt may need to scrape together an extra $400 or so each month.”

“Westpac chief economist Dominick Stephens says some people may have been operating under the mistaken impression that low interest rates would last forever. ‘We may find that some highly-leveraged borrowers are surprised and put in a difficult position by the substantial series of interest rate hikes that we think is coming, he said.”

“Yang Bin, economist: ‘China’s housing prices have been a growing bubble. Prices in Beijing have been exaggerated and unreasonably higher than similar in the United States. I want the bubble to fail. We all hope it will fail. It’s too unreasonable. The average Chinese lifetime income can’t manage to buy a house. The government works with the developers. They make the profit, one sells the land, and the other make the money. They monopolize the industry and deprive people of their life-time hard work. The high price has seriously affected the spending power of China. The house prices kill the entire spending power.’”

“Penrith’s booming property market could be headed for a sharp fall, leaving many out of pocket, a home-seeking economist has warned. ‘Either [home] prices fall 50 per cent or incomes rise by 50 per cent,’ said Rodney Forrest, who lives in Penrith and is managing director of an investment research house. He said this was because median home values in Penrith, about $455,000, were priced at about six times the average local income, far above the global average of three times local income.”

“‘We have rapid credit growth and maniac irrational expectations: the two ingredients of a bubble,’ Mr Forrest said. ‘Once the bubble bursts, the fiscally irresponsible will be burned.’”

“Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy. Investors got a taste of the hazards in recent days when news of a slowdown in China’s economy, coupled with expectations of reduced stimulus from the Fed, helped trigger a rout in emerging markets that had been pumped up by easy money imported from the U.S.”

“The Fed is devoting ‘a good deal of time and attention to monitoring asset prices in different sectors’ to see if bubbles are forming, Yellen, currently Fed vice chairman, told the Senate Banking Committee on Nov. 14. ‘By and large,’ she said, ‘I don’t see evidence at this point in major sectors of asset-price misalignments, at least of a level that would threaten financial instability.’”

“Stephen Cecchetti, former economic adviser for the Bank for International Settlements, agreed with Yellen that there aren’t many signs now of dangerous financial imbalances. Yet that’s not a reason to sound the all-clear. ‘We’re into the sixth year of zero interest rates,’ he said. ‘You do worry that there’s got to be something going on that maybe you’re missing.’”

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The Sacramento Business Journal reports from California. “In the last three months of 2013, 136 homes priced at $750,000 or above in Sacramento, El Dorado and Placer counties sold, up from 116 during the last quarter of 2012. The median sales price of $920,000 was about 2 percent higher than a year earlier. Homes priced over $1 million sold at 47 percent higher clip. Kris Vogt, president of Coldwell Banker Residential Brokerage in the Sacramento-Tahoe region, said finances play a role in where people with money choose to live, but other factors do as well. ‘At the end of the day, there’s something unique and intrinsically valuable in California real estate,’ he said.”

The Manteca Bulletin. “Ripon continues to set the standard when it comes to home values in the Northern San Joaquin Valley. The median price of existing homes based on closed escrows rose to $300,000 in 2013. Perhaps even more indicative of how popular Ripon is with home buyers is the average time that the 201 homes that sold in 2013 stayed on the market. It was 24 days. Ripon isn’t experiencing the double digit gains that many communities in California experienced in 2013. Manteca, for example, saw the 35.4 percent jump in value last year to a median of $255,000. That meant the median price for existing homes that sold in Manteca during 2013 was up $66,750 from 2012 levels.”

The Marin Independent Journal. “New lending rules being phased in this month could make it harder for some Marin residents to get mortgages, experts said, while many extolled the protection the rules offer for buyers. ‘I see it (the regulations) as a good thing,’ said Bob Ravasio, an agent with Coldwell Banker. ‘We’re hearing people talk about a bubble forming in real estate once again. This is one more thing that will make it more difficult to keep that from happening.’”

“‘I have a concern where protection tips toward prevention. If you have a jumbo investor who is making interest-only loans and we start to see people start filing lawsuits, things might change. The lender will have no legal defense in those cases. That’s the six-million—dollar question. What is going to happen? We don’t know until the first one ends up in court,’ said Rob Spinosa, a loan officer in Mill Valley.”

The Santa Cruz Sentinel. “The median sales price for single family home in Santa Cruz County in December was $618,500, down from $674,444 in November but up from $528,920 a year ago. Gary Gangnes of Real Options Realty observed 21 of the 138 sales last month involved distressed properties, double the percentage from the month before, with 16 of 21 selling for less than $450,000, bringing down the median, which is the midpoint of what sold.”

“The high-end market is soft. A five-bedroom, five-and-a-half bath 2,800-square-foot home, suitable for a family compound, sold for $2.1 million in December to a buyer who had been hunting for three years. The initial asking price was $2.95 million. ‘It was a unique property, it took a unique buyer,’ said Linda Bailey of Vanguard Realtors, noting it was appraised for $3.5 million.”

“Bailey got 10 offers after a single showing of a three-bedroom home on the Santa Cruz Westside, currently rented and priced at $749,000. Six of the 10 are for more than the asking price. Her advice to sellers in this bracket: ‘Don’t wait till spring. Do it now.’”

“‘Anything in the median price range goes,’ said Alex Johnson of David Lyng Real Estate, cautioning against overpricing. ‘Buyers are looking for turnkey properties, a nice kitchen and a nice bath. Those are the ones that are selling fast as long as they are competitively priced.’”

The Signal. “As sales of condominiums posted strong gains in the Santa Clarita Valley and home prices continued rising in 2013, investors pulled back from the single-family home market, a Realtors association reported. One local Realtor said she expects home sales to continue rising as inventory increases this year. Homeowners are beginning to use newfound equity in their homes, which will create more inventory and more sales, said Cherrie Brown.”

“‘Real estate listings are now entering the market at a faster rate than they were back in October through December,’ said Connor MacIvor. The increased inventory, however, slows price increases down a little as buyers have more options, he said. Homes are now entering the market at a faster rate than they are selling. ‘Within the last seven days we have had 59 listings that changed their (sales) prices; 85 percent of the homes experienced a reduction,’ MacIvor said.”

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The Post and Courier in South Carolina. “It occupies the top floor in one of Charleston’s tallest buildings. And, if sold at its $19.5 million list price, the expansive two-story penthouse could mark another high: the largest amount ever for a condominium in the historic city. John Dunnan of Handsome Properties Inc., who’s listing the penthouse said he’s confident the Charleston market can accommodate such a listing. Dunnan’s listing rivals high-priced properties commonplace in larger cities such as New York, Atlanta and Miami. ‘The economy is improving and the market is just arriving,’ he said. ‘We took the appraised value for a listing in New York City and cut it half for comparable size with the same interior designer.’”

The Miami Herald in Florida. “Marc Sarnoff played his part quickly Wednesday morning, shoveling some dirt on the ground of a Brickell Avenue construction site for a ceremonial groundbreaking. He didn’t linger after the photo op; there was another shovel awaiting him at another condo tower groundbreaking in just 25 minutes. And one more after lunch. ‘We’ve never had a three-groundbreaking day in the history of Miami,’ said Sarnoff, a Miami city commissioner. ‘I’ve done two, but never three.’”

“Related Group CEO Jorge Pérez said Florida lends itself to boom and bust cycles, but he said the company learned lessons from the crash. He said the 453-unit SLS Brickell is almost completely sold out, with buyers agreeing to pay 50 percent of the purchase price before construction workers finish the top floor of the 52-story building. ‘We are trying to reduce the chance,’ he said, ‘that there will be a bust like the last time.’”

Miami Today in Florida. “How bad has the foreclosure crisis been in Miami-Dade County? Initial filings here dropped by 36% last year, yet the county remains the foreclosure capital of the US. Meanwhile, 46 condominium projects are in construction in the tri-county area of Miami-Dade, Broward and Palm Beach, according to Peter Zalewski, a principal consulting firm Condo Vultures. He said there are areas of concern where inventory and price levels have been rising at alarming rates: the Brickell area and the beachside communities north of Miami Beach: Surfside, Bal Harbour and Sunny Isles Beach. He said he’s most concerned that Brickell’s condo market is overheating.”

“‘Developers are sprinting to put their buildings up,’ he added, ‘because the first ones [into a market after a price collapse like the last one and the first to get out] are the ones who don’t get hurt.’”

The Palm Beach Post in Florida. “A new report found that 2013 saw an increase in buyers with plans to either flip the homes or renovate and rent. According to RealtyTrac, 12 percent of Florida home purchases in 2013 were made by institutional investors, up from 9 percent in 2012. Local investors are watching the purchases with concerns. They say Wall Street buyers like Blackrock, which owns Invitation Homes, and Colony Financial, are overpaying for properties, artificially jacking up the prices.”

“‘It’s what I call the corporatization of residential America,’ said Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach. ‘You have a lot of neighborhoods now where big percentages of homes are owned by corporations and what happens to the community in the long run isn’t being talked about.’”

All Alabama. “When they first went on the market around Thanksgiving of 2013, the three available condos in the Antoinette building ranged from $449,000 for the two downstairs units to $549,000 for the upstairs unit. But Debra and Daly Baumhauer, who bought the building last April and have spent the past few months renovating it, have reduced the prices to $349,000 and $375,000.”

“The Baumhauers sold their family home in Spring Hill and now live in one of the upstairs units in the Antoinette. ‘It’s a knockout, high-end building,’ said Realtor Ashley McLean of LLB&B Inc. ‘You feel like you’re in a New York apartment.’”

The Tennessean. “Jill Tzompanakis has seen the effect that foreclosures have had on her neighbors’ home values, so she’s relieved to hear that the number of distressed properties in Wilson County has fallen dramatically over the past year. ‘It kills the comps in a neighborhood and kills the value,’ the Lebanon homeowner said.”

“Tzompanakis and her husband, Nick, have owned a home in the Spence Creek subdivision for about six years. They have seen the prices of some homes decline and believe foreclosures continue to affect the market. ‘What foreclosures sell for, it’s so low it shocks me,’ she said. One house that originally sold for $275,000 was purchased in foreclosure for $168,000, Tzompanakis said. ‘You hear stories like that and you wonder,’ she said.’”

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The Plain Dealer reports from Ohio. “Home sales continued to climb out of their trough in 2013, posting double-digit percentage gains in Northeast Ohio and across the state. But tight inventory in some markets and anemic job growth in cities including Cleveland continue to hold back sales and limit the pool of potential buyers. ‘Anything was better than 2012, so the numbers are always going to look good,’ said Scott Phillips Jr., the president of the new Rocky River office of Keller Williams Realty Greater Cleveland. ‘But 2013 probably wasn’t as fantastic as a lot of people are saying it was.’”

“Listings remain limited in some communities, and buyers scouting select Northeast Ohio neighborhoods are clamoring for fresh options. Yet overall, Phillips said, ‘I would actually argue that there is a decent amount of inventory on the market, but we’re back to the stage where people are getting a little greedy, and it’s overpriced.’”

From Michigan Live. “Michigan’s foreclosure activity has slowed to levels last seen before the housing crisis, but bank-owned properties still accounted for nearly one-fifth of all home sales last year. Meanwhile, overall home sales and prices continued to rise in the Great Lakes state. Bank-owned properties accounted for 18.4 percent of all sales in 2013, second only to Nevada at 20.4 percent. ‘There are not a lot of new foreclosures entering the pipeline, but the pipeline is still very full of properties that have been foreclosed on in last seven or eight years and still have not been absorbed by the housing market there,’ said RealtyTrac VP Daren Blomquist.”

The Star Tribune in Minnesota. “The century-old duplex in north Minneapolis is locked and empty. The front window is cracked. A neighbor says only teenage squatters lived there in the last year, since a blaze displaced 24 people that had been crowding into eight bedrooms.”

“Last month, the home sold for $46,500 cash to a California investor after languishing for months on the market. It is the latest sale in a tumultuous journey that began nearly a decade ago, when the duplex sold for $290,000 and then endured two foreclosures, an investor that went belly-up, a chain of Wall Street bank trustees, and placement on the city’s vacant building registry after the fire rendered it uninhabitable.”

“Even as the housing recovery is taking hold throughout the metro area, progress in the neighborhoods of north Minneapolis has been slower. Homes that are in foreclosure or at risk of foreclosure represented about 45 percent of all transactions in 2013, almost twice the rate across the metro area. The cycle that has prevailed here — vacant homes, bought by investors, rented to people with little interest in the neighborhood ­— is still in full force. ‘They drive up with them big rental trucks and they’re in,’ said Jerry Millner, who lives on the block. ‘Two months later they drive up with a big rental truck and they’re out.’”

Shelby News on Indiana. “While blighted neighborhoods may be taboo to speak about, Indiana Sen. Jim Merritt, R-Indianapolis, is willing to talk about the issue, and he is not mincing any words. On Wednesday night, Merritt told a small gathering of citizens in Shelbyville that blighted and abandoned homes are a ‘poison to communities.’ This year, the Indianapolis area ranked No. 1 in the nation for the percentage of homes in the foreclosure process that had been abandoned, according to RealityTrac. Statewide, approximately 5,000 of the 16,618 foreclosed homes had been abandoned.”

“Shelbyville Mayor Tom DeBaun said blight and abandoned homes are a ‘problem’ in his town. DeBaun said there are approximately 115 properties the city takes care of to an annual expense of $50,000. ‘We demo two to three homes a year. Many lots have assessments that can’t sell at certificate sales. We appreciate what you are doing. It is a broken window in our community, and a lot of the properties are in limbo,’ DeBaun told Merritt.”

The NWI Times. “Illinois ranked first nationally in the number of residents leaving in 2011, and has been second for each of the past two years, according to the United Van Lines study. Indiana did not fare much better in a similar study by Atlas Van Lines, which found the Hoosier State was third in outbound migration. Indiana’s 59 percent outbound rate trailed only Connecticut and New York. About 57 percent of the people who hired the moving company in Illinois were headed out of the state.”

“That is the case with much of the Midwest, according to the Atlas study. More than 55 percent of on-the-move people also were headed out of Ohio, Minnesota and Nebraska. Also, no Midwestern state has been inbound instead of outbound or balanced for more than 10 consecutive years.”

“The Hlistas are part of a growing number of residents who have decided to move away from Illinois. Jeff and Linda Hlista lived in a tri-level house in Oak Lawn up until a few years ago, when a property tax bill that was once $1,000 a year rose to a hefty $5,500. They had enough and moved to Highland, where they found that just about everything – including tax bills, cigarettes and movie tickets – was cheaper than it was in Illinois. They now pay $4 to $4.50 per pack of cigarettes, instead of $9 or $10. They no longer worry about falling behind on property taxes and losing their home.”

“‘The assessed value of our house fell by $40,000, but the taxes continued to rise,’ Jeff Hlista said. ‘I couldn’t figure that one out.’”

The Kansas City Star. “Most of us know downtown Kansas City is a hot spot for apartment development, but would you believe 40 percent of the residences in Overland Park are now multifamily? The apartment, once considered the main option for young adults getting their first place or people who couldn’t afford a house, has increasingly become home to what’s called the renter by choice market.”

“Bob Frye estimated one-third of the 180 apartments he’s building at his Founders at Union Hill development will be rented by people who could afford to buy. ‘Often, the focus is on economics,’ Frye said. ‘People don’t want their retirement money tied up in a house and want to keep their funds liquid. There’s also the service side. If a faucet is broken, you don’t have to fix it.’”

“Developer Michael Knight readily accepts the idea of people choosing to rent rather than own. He, his wife and 3-year-old plan to live in the planned redevelopment of the 30-story Commerce Tower office building. ‘I won’t buy a house; it scares me,’ he said. ‘People’s living conditions change, and when you own a house, you don’t have the flexibility to respond to change.’”

“Linda Welling, a 57-year-old art teacher, could have easily afforded a house. But a year ago she sold her home moved to an apartment in the River Market area of downtown. ‘I sold my four-bedroom house because the kids are gone, and I was tired of living there by myself,’ she said. ‘I had an estate sale, and it was the best thing I’ve done. Several people my age or older are doing the same thing. We like the no maintenance, not worrying about shoveling and all the things that go along with a house.’”

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The Boulder County Business Report in Colorado. “Home prices in Colorado are leaving wage increases in the dust. So is the state’s housing boom setting up for a cool-down in 2014? Ryan McMaken, communications director and economist with Colorado’s Division of Housing, thinks there could be some tapering of home-value appreciation. But as for a bursting bubble, he says that’s not a concern at this point. At the top end, Boulder County had more than 40 homes sales eclipse $2 million in 2013, a leap from just 18 such sales in 2012 according to figures from Legendary Properties broker Scott Franklund.”

“‘If it was a million-dollar home in 2012, they’re going to want a million-five for it now,’ Franklund said. ‘And they’ll probably get it.’”

The Denver Post in Colorado. “Housing markets across Colorado hit the brakes hard in the fourth quarter, according to a report from the Colorado Association of Realtors. Colder weather and the holidays typically cause activity to slow in the final three months of the year. But the rate of deceleration as 2013 ended was enough to raise concerns for 2014. ‘Our biggest challenge is not having enough inventory to meet the needs of all the buyers wanting to be in the market. Many people end up disappointed,’ Duane Duggan, a broker with Re/Max of Boulder, said in a statement.”

“The northern Front Range’s heated housing market appears to have contributed to a another kind of surge: fraud on mortgage applications, according to a new report from Kroll Factual Data. ‘Boulder, Denver and Fort Collins are hot markets and are having more loans made. You are also seeing more instances of application and identity fraud,’ said Michael Mauseth, senior VP of product and channel development at the Loveland company.”

“The Fort Collins-Loveland area showed a 51.4 percent increase in suspicious mortgage activity in the third quarter from the second quarter, the second-highest gain in the nation after Huntsville, Ala. Boulder-Longmont ranked fifth with a 32.3 percent jump, Greeley 11th at 22.4 percent and Denver 25th among metro areas studied at 16 percent.”

The Santa Fe New Mexican. “Santa Fe Realtor Coleen Dearing says homeowners here shouldn’t pay attention to the national stories about double-digit home-price gains. She said many sellers are pulled in by articles that group New Mexico and Santa Fe with the fast-appreciating markets of Denver, Texas and even Phoenix, and they can get discouraged about the market price of their home. ‘They see the national news and think it extrapolates locally,’ she said.”

“Santa Fe is still getting the retirees who want to relocate, but home sales to those coming for a job have stalled. ‘Folks will always keep coming here because it’s a great place to live, but people coming here for jobs — that has been stymied,’ Dearing said.”

“According to David Barker, president of Barker Realty, the median sales price per square foot decreased for the sixth consecutive year. The time on market has dropped to an average of 170 days. That’s a 21 percent decrease from 2012 (212 days) and 40 percent below the 289 days in 2011. But the steady market also is bringing more sellers, and some of them are banks and lenders looking to unload distressed and foreclosed properties. The fourth quarter of 2013, for instance, saw the inventory of homes for sale increase 7.7 percent to 1,923.”

The Arizona Daily Star. “Tucson’s residential real-estate market improved by most measures in 2013, with gains in home sales and prices. But the market is still far from its pre-recession boom, or even what’s considered a normal market, and industry experts see only gradual improvement in 2014 as foreclosures continue to weigh heavily on the market.”

“‘We have largely recovered in our volumes in the resale market and right now it’s kind of just a matter of absorbing those foreclosures,’ said Ginger Kneup, owner of Bright Future Real Estate Research in Sahuarita. ‘We look at the appreciation not being as much as we would like it to be, but the progress is kind of underlying that. There’s an undercurrent of weeding through these foreclosures, and we can’t really move things forward until that’s done.’”

“Investors are finding it harder to fix-and-flip foreclosure homes, said Kimberly Clifton, president of the Tucson Association of Realtors Multiple Listing Service. ‘There have always been foreclosure and agents that specialized in foreclosures, but now instead of three or four guys down at the courthouse steps, now there’s 30,’ she said. ‘Everyone wants to make a quick buck and the problem right now is, especially in the investor market, there are fewer and fewer homes that are selling with a high margin, which is a good thing for the consumer, quite honestly.’”

The Arizona Republic. “The number of houses for sale in metro Phoenix has climbed almost 40 percent in the past year. With many more properties from which to choose, the market is tilting away from sellers toward people looking to buy. The entire region can’t yet be called a buyer’s market, but certain areas, including the northwest Valley and Pinal County, have enough houses listed for sale to exceed demand. The nearly 72 percent increase in home prices since August 2011, to $199,000 from $116,000, is one key reason more homeowners are looking to sell.”

“The number of listings is expected to keep climbing in the Phoenix area. With the past year’s price increases, more owners can sell for a profit. And more houses for sale will swing the market in buyers’ favor. ‘It won’t be long before supply will exceed demand,’ said Mike Orr, director of the Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University.”

“Sellers, who have seen many properties sell within 30 days over the past year, may have to bide their time before they get an offer. Bobby Lieb, an agent with HomeSmart, said people now are taking more time and want to see more properties before deciding on a house. ‘There’s not the urgency among buyers there was last year,’ he said. ‘Buyers now typically want to see 20 to 30 houses and want a few weeks to make a decision.’”

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A reader asked, “Does the stock market’s futures worry you?”

From USA Today. “Wall Street is a world away from Turkey and Argentina and the other developing economies dotting the globe. But recent news of financial tumult and plunging currencies in some emerging markets, coupled with bad memories of past crises over the past 20 years that began in Mexico, Asia and Russia, has imported a boatload of financial angst back to the United States.”

“Hot money can turn cold. Emerging markets are the future growth engine of the global economy and an important source of profits for U.S. companies. These developing economies were both recipients and beneficiaries of massive cash inflows the past few years as investors sought out bigger returns fostered by injections of cheap cash from the Federal Reserve and other central bankers.”

“A crisis in confidence could surface. Financial stability is built on confidence, and sentiment can shift quickly if confidence erodes, says Joe Quinlan, chief market strategist at U.S. Trust. ‘A declining currency is the clearest sign of investors bolting for the door; it’s a vote of no confidence that usually sparks sell offs in other assets, both credit and equity,’ says Quinlan. ‘And because investors still view emerging market assets as homogeneous, a swooning currency or asset class in one emerging market usually prompts sell offs in other emerging markets, raising the odds of contagion.’”

The China Money Network. “The author is Standard & Poor’s Ratings Services’ director of financial institutions ratings, Liao Qiang: The potential failure of a collective trust program distributed by Industrial and Commercial Bank of China Ltd. (ICBC) could expose the vulnerability of China’s banking industry. We are inclined to believe that the RMB3 billion collective trust program will fail, because Chinese policymakers have long recognized the moral hazard stemming from “make-whole” practices and the detrimental impact to economic balance. We do not expect ICBC to bail out the program.”

“If the collective trust program is bailed out by some stakeholders other than ICBC, the moral hazard and potential problems in the system will still continue to grow. While our BICRA on China is unlikely to face immediate downward pressure, a good opportunity of instilling market discipline will have been missed.”

“We expect Chinese banks to take differentiated positions toward distressed wealth management products they have distributed. Chinese banks are unlikely to bail out high-yield wealth management products unless the banks happen to be the originator of the products.”

“In China, trust companies or unregulated non-bank entities originate most high-yield wealth management products. We view mass-market wealth management products as term deposits in disguise. We expect timely and sufficient liquidity support from the banks from which these products originate.”

“We continue to view China’s shadow banking more as a symptom than a cause of some emerging systemic risks to the banking sector and the wider economy. In our view, Chinese banks have already accumulated high credit risks on their balance sheets. But distorted growth in shadow banking could lead to further unintended buildup of credit risks that banks may not fully appreciate. Certain parts of the shadow banking sector, notably trust companies, may prove to be the weak link of China’s financial system.”